What is an installment sale?
An installment sale is another technique to defer you capital gains taxes. An installment sale the seller of the property puts up some or all of the financing to get the deal completed. The investment property is being taken over by the new buyer, but will not be actually paid for until a later date.
So how is an installment sale different from the 1031 exchange. Well with the installment sale, the seller is selling an investment property without getting a new property in return and still has a delay in payment. The selling property investor is basically selling using owner financing.
The selling investor won’t get a lump sum for the property. Instead the seller is the lender. The seller gets payments each month and delays paying capital gains taxes until the new investors pays off the loan.
called installment sales. As far as taxes are concerned, it differs
Some investors use the installment sale to generate income without having to do any work. It is a win win for the investor, if the new property investor does his due diligence and is responsible. If you are wanting to try an installment sale, remember that if the new investor gives you a down payment, you will have to pay taxes on that.
The returns you can get on an installment sale are generally better that what you can get in other investments such as stocks and Cds. Also, since you haven’t paid your capital gains taxes, you will be earning interest on that money.
If you wanted to be creative, you could create a no money down deal, that way you would have to pay no taxes since there is no down payment received.
Refinancing
Investors can use refinancing to avoid paying their capital gains taxes. The investors would get new financing to pay off their older loan, giving them more cash at closing because the value of the property has increased. No taxes on the profit taken at closing. Money was borrowed from the bank, therefore it has to be paid back, so no taxes paid.
Investors should consult their accountant when dealing with refinancing and taking profit. There are situations in which you would have to pay taxes, like if you refinanced then decided to sell the property. It can get complicated, so discuss it with your accountant.
Just remember that you won’t have to pay capital gains UNTIL you pay off or sell the investment property. You can’t delay it forever. Also discuss all the tax delaying tricks like the 1031 exchange, installment sales, and refinancing with your accountant or attorney to see what type of plan will work best for you.
